The Reserve Bank could hike interest rates as early as September, according to BNP Paribas SA, a move that will strike a further blow to consumers who are already hobbled by the fallout of the Covid-19 pandemic and recent violent protests.
Senior economist at BNP Paribas SA Jeff Schultz expects the Bank to increase rates by 25 basis points in September and November, respectively, citing the effect of higher international oil and food prices on the inflation outlook.
“Near-term economic concerns related to violent protests that have gripped the country this week and the country still in the midst of the third Covid-19 wave … mean that the central bank will keep a cool head next week,” Schultz said in a research note on Wednesday.
The Bank is expected to leave rates unchanged at a record low of 3.5% when it concludes its monetary policy committee meeting next Thursday, but could lay the groundwork for policy normalisation.
The policymakers lowered their benchmark interest rate by 300 basis points in 2020, with 275 basis points of cuts coming since the onset of the pandemic, in an effort to bolster the economy.
The spot price of Brent crude has steadily been rising, boosted by pent-up demand as world economies recover from the ravages of the pandemic amid an acceleration in vaccine rollouts in developed markets in particular.
Brent crude hovered near $76 a barrel on Wednesday afternoon, slightly below its three-year high of $77 a barrel touched a week ago. The price of Brent crude, which has risen about 45% so far in 2021, pushed local fuel prices to a record high.
Higher international oil prices come against the backdrop of renewed volatility in the rand-dollar exchange. The rand recovered 0.60% to R14.6422/$, after sinking to a three-month low of R14.7279/$ in the wake of widespread looting of malls and factories, which have led to the temporary closure of businesses in Gauteng and KwaZulu-Natal.
The weaker rand increases the cost of imported goods such as oil and could lead to higher inflation, though a weaker economy limits the effect of higher inflation.
“We expect the SA Reserve Bank to make upward revisions to its … Brent crude oil assumptions [of $62 a barrel] in its models, while the trends in global food prices suggest that we have not yet seen the peak in domestic food CPI [consumer price inflation]," Schultz said.
International prices of soft commodities from maize to wheat are still elevated after surging in the second half of 2020, driven by the combination of global supply chain bottlenecks as a result of Covid-19 and the drought in parts of the world.
BNP Paribas SA expects CPI to average 5% in the second half of 2021, which is higher than the Bank’s preferred midpoint of 4.5%, while Brent crude is forecast to end the year at about $80 a barrel.
Consumer inflation reached a 30-month high in May, driven by the so-called base effect, meaning that prices normalised after the unusually low levels of 2020. CPI quickened to an annual 5.2% in May 2021, up from 4.4% in April. Stats SA will update inflation figures for June next Wednesday.
Schultz expects interest rates to rise by cumulative 75 basis points in 2022.
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